Behavioral Finance: Psychology of Money

In finance, IQ (Intelligence) matters less than EQ (Emotional Stability). You can know all the formulas, but if you panic when the market crashes, you will lose.

As Morgan Housel says, "Doing well with money has a little to do with how smart you are and a lot to do with how you behave."

The 5 Dangerous Biases

Our brains are wired for survival (running from lions), not for stock markets. Here are the glitches in our matrix:

1. Loss Aversion

The Pain of Losing > The Joy of Gaining.

• Losing ₹1,000 feels twice as bad as finding ₹1,000 feels good.
• Result: People hold onto losing stocks ("I'll sell when it recovers") and sell winning stocks too early ("Let me book profit before it vanishes").
• Fix: Set a Stop Loss. Follow rules, not feelings.

2. Herd Mentality (FOMO)

"Everyone is buying Crypto/Adani/Tech stocks, I should too!"

• Result: You buy at the peak (when everyone is excited) and sell at the bottom (when everyone is scared).
• Fix: If your taxi driver is giving stock tips, it's time to be careful. Be a contrarian.

3. Recency Bias

We think the future will look exactly like the recent past.

• Market went up last year? "It will go up forever!"
• Market crashed yesterday? "It will go to zero!"
• Result: Chasing past performance. Buying funds that gave 50% return last year (and will likely underperform now).
• Fix: Look at 10-year data, not 1-year data.

4. Confirmation Bias

We only look for information that agrees with us.

• You bought Tata Motors? You will only read news that says "Tata Motors to skyrocket" and ignore news about "Chip shortage."
• Result: Overconfidence and ignoring risks.
• Fix: Actively look for reasons why you might be WRONG.

5. Anchoring

Sticking to an irrelevant number.

• "I bought this stock at ₹100. It is now ₹80. I will sell only when it comes back to ₹100."
• The market doesn't care about your buy price. If the company is bad, sell at ₹80 before it goes to ₹50.
• Fix: Ask "If I didn't own this stock, would I buy it today at ₹80?" If No, sell.

The Cycle of Greed and Fear

1. Optimism: Market goes up. "I'm a genius."
2. Excitement: "I'll quit my job and trade full time."
3. Euphoria (Peak): "This time it's different! Borrow money to invest!"
4. Anxiety: Market drops slightly. "Just a correction."
5. Fear: Market drops more. "Why is this happening?"
6. Panic: "Sell everything! I want my money back!"
7. Despondency (Bottom): "I will never invest in stocks again."
8. Hope: Market recovers. "Maybe it's okay."
9. Optimism: Cycle repeats.

Smart Investor: Buys at "Despondency" and Sells (or holds) at "Euphoria."

How to Hack Your Brain

1. Automate Everything (SIP)

Remove "You" from the equation. If money gets invested automatically on the 1st of the month, you can't panic or procrastinate.

2. The 24-Hour Rule

Before buying any expensive item (>₹10,000) or making a big trade, wait 24 hours. 80% of impulses die overnight.

3. Stop Checking Your Portfolio

Checking daily increases stress. The more you look, the more likely you are to find a "problem" and "fix" it (by trading). Check monthly.

4. Define "Enough"

The hardest financial skill is getting the goalpost to stop moving. If you have "Enough," stop chasing risky bets to get "More."

7-Day Action Plan

Day 1: Recall your worst financial mistake. Which bias caused it? (FOMO? Greed?).
Day 2: Check your portfolio. Are you holding any "Losers" just hoping to break even? (Anchoring).
Day 3: Unsubscribe from "Stock Tip" channels and notifications. Reduce noise.
Day 4: Set up an automated SIP if you haven't.
Day 5: Write down your "Investment Philosophy" (e.g., "I buy Index funds and hold for 10 years"). Read it when market crashes.
Day 6: Delete the trading app from your phone if you check it too often.
Day 7: Read a chapter of "The Psychology of Money" by Morgan Housel.

Quiz

💡 Final Wisdom: "The investor's chief problem—and even his worst enemy—is likely to be himself." — Benjamin Graham. Master yourself, and the market is easy.